Rheinmetall-BAE merger – The German group becomes hegemonic in Europe

The German group Rheinmetall is on the offensive in Europe, and does not intend to undergo the consolidation efforts of the European defense industry. After the surprise announcement of a possible takeover of Krauss-Maffei Wegman in November 2018, it announced the creation of a joint venture with the English BAe by taking the majority of the latter's "armored" activities . 

Through this operation, Rheinmetall is participating in British Defense programs, more particularly in the MIV programs and the modernization of the Challenger 2. Last year, the British government had already awarded the German group the contract for the acquisition of 500 Infantry fighting vehicles, a contract worth nearly 4,4 billion pounds.

Considering the British choice in favor of the German IFV, this announcement may seem surprising. It is based on the same logic as that concerning the merger with KMW. Indeed, the Rheinmetall group does not have a particularly distinctive armored offer in Europe, and certainly not compared to KMW. On the other hand, the German group has a much more efficient operational and capital structure than those of its European competitors. Not only is Rheinmetall widely diversified, with defense representing only 50% of its activities, but the company has been able to consolidate its activity through strategic acquisitions, particularly in its Supply Chain. Therefore, if publicly it will respect the activities and direct employment of the major companies that have fallen into its hands, it will have the possibility of promoting its subcontracting activities, which represents the true heart of Defense economic activity.

This is a major problem for France. Indeed, Nexter is committed to KMW in the KNDS joint venture. By taking the majority of KMW, Rheinmetall will therefore have a say in Franco-German programs, such as the new generation MGCS battle tank program. Rheinmetall will obviously respect the industrial sharing imposed by the two States, but at the heart of the joint venture, it will have the possibility of imposing its own subcontracting offers. 

From an economic point of view, the rating therefore risks being very negative for France, because if the BITD generates on average 10 jobs per million euros invested each year, the subcontracting chain generates 9, and is the basis of 4 induced jobs. In other words, this approach would potentially divide by 2 (1,85 to be precise), the economic efficiency of Defense investment in the Country. However, if 1 million euros today generates 27 jobs in total, and 1,45 million euros in revenue and budgetary savings for the State, it will only generate 0,85 if the French supply chain had disappeared in favor of the German supply chain, and in particular companies owned by Rheinmetall. 

It is therefore urgent to consider this risk, both for the French authorities and for Nexter, and to a lesser extent, Arquus, and to undertake the rapid consolidation of the French supply chain in terms of land weapons, so as to that Nexter is on equal terms with Rheinmetall during the upcoming negotiations.

Read the article in English (3 min)

https://www.defensenews.com/global/europe/2019/01/21/rheinmetall-bae-systems-launch-joint-venture-for-military-vehicles/

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